A reverse mortgage is when a home owner(s) who is at least 62 years or older convert their home equity into cash. Basically, it is a loan for the home owner and the property is used as collateral. The loan is not paid back unless the home owner moves out or passes away. Reverse mortgages may sound like a good thing, however there are a few pros and cons that home owners should consider.
One of the pros of a reverse mortgage is that it can reduce the homeowner’s monthly expense. When homeowners get a reverse mortgage, they do not have to pay a mortgage every month. Instead, the interest is put in the back of the mortgage loan. However the homeowner will have extra funds every month, since a mortgage bill is eliminated.
Another pro of a reverse mortgage is that the loan balance can never exceed the value of the home. For example, if the home value is $100k, the debt could never exceed that amount because reverse mortgages are known as non course financing, which means that the lenders aren’t obligated to homeowners other assets.
Lastly, there aren’t any taxes on the reverse mortgage income that the homeowner receives. The IRS considers reverse mortgages as proceeds from the loan and therefore the loan isn’t taxable. This is great for the homeowner and keep more money in the homeowners hands. Although there aren’t any taxes on the income, the interest rates however, can’t be deducted unless the loan is paid off in full.
Some of the cons of having a reverse mortgage is that once the homeowner passes away, the heir(s) are responsible for 95% of the loan balance. This can be a problem for homeowners who wants to pass properties to their heirs and the heirs can’t afford the payments. However, there will be several options for the heirs to utilize to satisfy the loan.
The other con in using reverse mortgages is that the property can be foreclosed at anytime. Even though homeowners wouldn’t have any mortgage payments, there will still be other expenses that they will be responsible for such as taxes, insurances, and or maintenance. If these obligations aren’t met, the homeowner risk getting their property foreclosed.
The next con in reverse mortgages is that it comes with several fees that homeowners may not be aware of. Some of these fees are mortgage insurance, closing cost, services fees, etc. These fees are usually added on the back of the loan. However this will cause less equity and more debt to the homeowner.
The idea of reverse mortgages may be great for a few homeowners since lenders will pay you instead of you paying a mortgage. But the pros and cons need to be weighed in if you are going to consider utilizing one. The best thing is to review your financial goals and go through the pros and cons to see which one is right for you and your family.